Friday, January 22, 2010

Irregular Income: Our method

One of the things I like about Dave's plan is that he has a system for irregular income. After all, there are probably very few people who have a set income EVERY week of EVERY year. There are always surprises (good and bad) - bonuses, tax returns, over time, tips. Just because it's not in the form of a salary, doesn't mean it's not income. I think a lot of people make big mistakes when it comes to irregular income. They seem to go to one of two extremes. On one extreme, people see things like bonuses as "free" money and blow the whole check on fun things and splurges. At the other extreme, you have people who treat bonuses as part of their regular income and expect and rely on it to pay their bills. The problem with both extremes is the question of what happens when it is no longer there? On both extremes, you get accustomed to a way of life that is unreliable and some times unrealistic.

Tim is in sales, so he's always had a job with bonuses built in. Before we started Dave's Total Money Makeover, we would often blow through an entire bonus without much thought. It wasn't usually on stupid purchases, because we're pretty basic people, but it also didn't have a purpose so it was usually gone before we had a chance to enjoy it. Now that we're debt free and have mastered our monthly budgeting system, we've decided it's time to figure out a method for our irregular income that we were comfortable with and felt was effective.

Before we were debt free, we were some what focused with Tim's bonuses and my income. We put 75% of it toward debt (or emergency fund once we were on step #3) and the rest sort of filled in the blanks and went for what ever we needed at the time (i.e. Blow fund). In 2010, we decided to be even more proactive with our money. We have set up a formula. When ever I generate income or Tim gets a bonus, we simply put in the total and it's divided in to the following categories:

10% - Church or Charity
25% - Invest in Roth IRA
15% - Invest in College Fund
25% - Car Replacement Fund
10% - Home Repair Fund
5% - Extra House Payment
5% - Gift Fund
5% - Blow Fund

Now every penny is spoken for before we even make the money. This structure is some thing that works well for us. It helps avoid the temptation of blowing a big chunk on some thing we want and not necessarily some thing we need. There are a couple categories that will cap out at a certain dollar amount and then we can adjust the percentages again. We also have a priority list for items in the home repair fund and blow fund. As money builds up in those funds we just move down the list (sort of a combination between sinking fund and irregular income budget form). For now,I'm really excited about this and think it will keep us focused and on track.

If you want to check out Dave's Irregular Income Budget Form, you can find it on this page with his other budget forms.

1 comment:

Kara said...

That second group os definitly where Chris and I were - we treated his regular overtime as a regular income. Then, when the economy tanked and that wasn't there, it was like we took a pay cut :-(

Lesson learned!

Great post! (I've linked to you. Hope you don't mind)

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